One of the most difficult things when it comes to choosing the best savings account or ISA is balancing flexibility with returns. With interest rates currently languishing at very low levels, it is tempting to look for as much interest as you possibly can in order to try and make the best of a bad situation. But the highest-interest accounts usually compromise on flexibility, often by requiring you to leave your money untouched until the end of a given term.
For some people, tying up a portion of their money for a few years is no big deal. But for others, it can be very difficult to know where to strike the balance. Should you settle for little interest in order to keep full access to your funds, or should you give up some flexibility to receive more money in return?
Obviously the single most important thing to consider is your own, personal financial situation. If you have any serious doubts that you can afford to have anything but complete, instant access to your savings you should choose your account accordingly. Lower interest will unfortunately be the price you pay to have the flexibility that you need.
That being said, not all fixed-term accounts completely close off access. By carefully considering the individual account, you may be able to get better interest without putting your financial situation in danger.
With a fixed-term account, you won’t necessarily lose access to your funds completely until the term is up. Rather, you will often face withdrawal penalties. These might be an outright charge or, more likely, loss of interest on the funds you withdraw for a set period. This means that, on the funds you withdraw, you effectively get a lower interest rate. However, that interest rate can still be quite attractive compared to true flexible accounts, and if your funds stay in there for a reasonable amount of time before you withdraw it can still allow you to maximise the interest you receive.
This is obviously useful if you need to access your funds before the term is up after all. It is also handy for people who want to seek the best rates. On the face of it, one of the disadvantages to signing up to a long term such as four or five years is that, if interest rates improve midway through the term, you will not be able to take advantage of the new, higher-rate accounts.
Supposing you are in a five year term, with 6 months lost interest as a penalty on withdrawn funds. If you find there are better rates in two years’ time, you can withdraw your funds and lose a quarter of the interest you have accrued. This will almost certainly still result in a better rate than an instant access ISA. It will also often be equal to or better than a two year ISA, with the added bonus that you choose how long you allow the term to continue. Special calculators can help you clarify how rates compare.